Price: 463p | Target: 500p | Rec: Buy A difficult Christmas with Food outperforming the industry and General Merchandise impacted by the well documented warm weather as well as another own goal with its distribution unable to handle Black Friday’s online volumes. We trim our forecasts by 2% with good cost control broadly offsetting weaker sales. With further progress expected in 2015, we believe the valuation does not reflect the gross margin opportunity and shift to cash generation. We reiterate our BUY.

Food still outperforming industry reporting Q3 LFL +0.1% (company consensus +1%; Q2 +0.2%) and FY gross margin guidance of +10 to +30bps was retained. This is a good result with its more specialist, quality credentials protecting it to an extent from the woes of the food retail market. Q3 General Merchandise LFL -5.8% (cons -3%; Q2 -4.3%). FY gross margin guidance of +150-200bps was retained?. Sales were expected to be down given the less promotional strategy and warm weather, but December’s distribution impact on online is visible as Castle Donington struggled to cope with Black Friday volumes. Online sales were -5.9% (Q2 -4.6%). Consumer confidence in using M&S.com was dented despite its delivery cut off pre-Christmas being 2 days later this year. Encouragingly, online sales turned positive in October and November, which shows that customers are getting used to the website. FY15E & FY16E PBT forecasts trimmed by 2%. The worse than expected sales have been offset to a degree by improved cost guidance from +3.5% to +2%. This brings us down towards the £640m FY15 PBT consensus for those that had already adjusted numbers for the Donington disruption. Valuation does not reflect gross margin opportunity and shift to cash generation: The unseasonal weather and online own goal yet again overshadows reasonable recovery progress elsewhere. Gross margin gains, efficiencies and better ranges are all visible and will feature in 2015.